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What checks are carried out by guarantor lenders?

Once you have selected a guarantor lender of your choice and applied through their website, your application will undergo a series of checks to determine whether you are right for a guarantor loan and how much you can borrow.

When applying for a guarantor loan, it is not just the main borrower that is assessed during the application but also the guarantor. This is typically a family member or friend who agrees to be part of the loan agreement and is willing to pay the balance if the main borrower cannot.

Our featured lenders are regulated by the Financial Conduct Authority and are committed to the responsible lending practices. Whilst the criteria may vary depending on the lender, the following checks are usually carried out prior to approving a loan:

  • Initial criteria checks
  • Loan agreement
  • Credit checks
  • Affordability measures
  • Phone call
  • Repeat customer check
  • Bank transfer to the guarantor

 

Initial Criteria Checks 

All lenders require the main borrower to be over 18 years of age, UK resident, employed with a monthly take-home of at least £500 per month, mobile phone, debit account and no history of bankruptcy or county court judgments.

You will typically be asked if you have a guarantor and to provide their information, including name, date of birth, employment status and contact details. Some lenders prefer guarantors to be 25 years or over. This is due to the responsibility involved and likelihood of having more credit history.

The questions in the application should be able to determine your eligibility and if successful, you will automatically be passed onto the next stage.

Loan Agreement Verification 

Both parties will be asked to read through and complete an online loan agreement stating the terms of the loan and their responsibilities. To save the time of printing and posting it off to the lender, most companies provide a way to electronically sign the documents using a PIN code sent to the mobile phone.

In order to complete the agreement, the applicants must have an active mobile phone. This is because the lender will need to confirm that the mobile works should they need to contact them in the future. 

Credit Checks To Assess Your Eligibility 

Credit checking is one of the main assessments used by guarantor lenders during the underwriting process. Using a credit reference agency such as Equifax, Experian or CallCredit, the lender will run a credit search on both the main borrower and the guarantor.

By checking the individual’s credit file, the lender is able to see their debt to loan ratio, how many other loans they have outstanding and their repayment history over the years. By looking at their credit score, it provides a strong indication of their creditworthiness and whether they are eligible for a loan.

In cases where the borrower may have a less than perfect credit history, it is important that the guarantor has a good credit history instead. This is because a guarantor with a strong credit history is deemed as less of a risk to the lender than someone with a weaker history.

Ideally, our lenders are looking for guarantors that are homeowners because you typically require a strong credit history and employment status in order to get a mortgage. Plus, a homeowner will be used to making monthly payments and in extreme cases, will be able to use their property to raise funds by renting it out or perhaps getting a second mortgage. However, we also feature lenders that offer tenant guarantor loans, so being a homeowner is not a requirement for all guarantors.

Affordability Checks To Determine How Much You Can Borrow 

Guarantor lenders will run affordability assessments on both the borrower and their guarantor. This is to get an idea of their income and expenses and determine how much they can borrow and afford to repay.

affordability-checks

In addition to asking for their monthly salaries, lenders may request proof of income and employment by asking the customers to send in copies of their pay-slips or bank statements. These can be scanned and emailed to the lender in order to process the application quicker.

By carrying out effective affordability metrics, the lender may decide to adjust the amount the person has asked to borrowed, extend the length of the loan or decide to the decline the application altogether. Read more about affordability checks here.

Phone Call To Both Parties  

Most lenders conduct a phone call to both the borrower and the guarantor prior to funding the loan. The purpose is to confirm the details of the application and check that they match up such as date of birth, employment and bank account details.

It is essential that the lender also speaks to the guarantor and explains the responsibilities they have. In the event that the customer defaults, the guarantor will be required to step in and make payment. Failing to do so may increase the outstanding amount and have a negative impact on their credit rating – so it is important that the guarantor is fully aware of this and this is usually confirmed via a telephone call at a convenient time.

Repeat Customer Checks 

If you are a repeat customer with the lender, you will likely accumulate a trust rating based on how well you repaid your previous loans. If you repaid on time and did not miss any payments, this may help your next application and possibly increase the amount you can borrow.

However, the lender will always have to run additional credit and affordability checks to ensure that you are still employed and your financial situation is not getting worse over time. If they discover that your financial position has worsened, then this may compromise your chances of getting a loan. Similarly, if they have improved, you may be eligible for an unsecured loan offered by some of the lenders such as Trust Two and UK Credit which can cost around 26% APR, compared to 49.9% APR of a guarantor loan.

The Loan is Transferred To The Guarantor First 

If the loan is successfully funded, the money will be sent to the guarantor’s debit account first. Seeing that the guarantor is usually someone with good credit or a homeowner status, the lender has peace of mind knowing that the funds of potentially £5,000, £10,000 or £15,000 is going to someone with a good track record.

From here, the guarantor has a ‘two week cooling off period’ (although the length may vary between lenders) where they can decide to pass on the money to the main borrower or send it back to the lender with no fees charged during this time. This is a sensible security check carried out by providers. In some cases, if it is a parent who is giving money to their child, they may not wish to give them the entire drawdown in one lump sum, but instead instalments, giving the guarantor more power.